Oil to rise after US leaves Iran deal – analysts

08 May 2018 22:38 Source:ICIS News

HOUSTON (ICIS)--Oil prices could rise because of the decision by the US to withdraw from the Iranian nuclear agreement, two analysts said on Tuesday.

Earlier, President Donald Trump said the US will withdraw from the Iranian nuclear deal and re-impose sanctions on the country.

Oil prices fell following Trump's announcement, but the analysts said the decline should be temporary.

"The main part of the sanctions that the oil market cares about are on the Iranian central bank, which deal with oil exports," said Matt Badiali, senior researcher at Banyan Hill Investment Research. "If reimposed, companies and countries will have 180 days to reduce their consumption of Iranian oil or face penalties from the US."

Before the nuclear agreement lifted the earlier sanctions, Iran's oil production was 3.3m bbl/day in 2015. In 2017, it reached 4.46m bbl/day, he said.

If Iran's oil production fell back to 2015 levels, Badiali said oil prices could exceed $100/bbl.

"Don't be surprised as oil prices climb steadily this summer and react quickly to the upside on any bad news," he said. "I expect to see quick price hikes and slow falls for the next six months."

Gerald Bailey, president of Petroteq Energy, also expects prices will increase.

Longer term, there would be less oil available so prices should rise, Bailey said. "We're not talking about big spikes, but there is some uncertainty here."

He added: "The US is not dependent on Iran unlike Europe, who will not back out because Iran buys a lot from Europe. Europe will not want to upset Iran."

If Iran threatens to resume nuclear testing and the US expresses concern, then any type of confrontation will raise oil prices even further, Bailey said.

Rising oil prices should benefit the US petrochemical industry because it relies overwhelmingly on ethane and propane for feedstock, whereas much of the world relies on oil-based naphtha.

When oil prices are high, the US industry benefits from lower gas-based production costs and higher oil-based selling prices.

Higher crude prices would also encourage more oil production in the US, which already is profitable at current prices.

More oil drilling in the US would increase production of associated gas, which is rich in ethane and other natural gas liquids (NGLs).

This would increase feedstock supplies to the US petrochemical industry, limiting price pressure on NGLs and further extending profit margins.

However, bottlenecks in US pipeline and truck capacity could limit the ability of oil producers to further increase output.

The nuclear deal was reached in 2015 under the administration of the previous US president, Barack Obama. It removed sanctions against Iran while allowing international nuclear inspectors to visit the country's sites.

The parties involved in the deal, the US, UK, France, China, Russia and Germany, wanted Iran to scale back its nuclear activities to prevent it from building a nuclear weapon.

Iran said that its uranium enrichment activities are strictly for energy generation.

It is unclear how the other countries in the deal will respond to the withdrawal of the US.

Additional reporting by Muhamad Fadhil

By Al Greenwood